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Asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market

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  • Rubio Irigoyen, Gonzalo
  • Martínez Sedano, Miguel Angel
  • Nieto, Belén

Abstract

Systematic liquidity shocks should affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks. Accordingly, this paper empirically analyzes whether Spanish average returns vary cross-sectionally with betas estimated relative to two competing liquidity risk factors. The first one, proposed by Pastor and Stambaugh (2002), is associated with the strength of volume-related return reversals. Our marketwide liquidity factor is defined as the difference between returns highly sensitive to changes in the relative bid-ask spread and returns with low sensitivities to those changes. Our empirical results show that neither of these proxies for systematic liquidity risk seems to be priced in the Spanish stock market. Further international evidence is deserved.

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Bibliographic Info

Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2002-05.

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Date of creation: Sep 2003
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Handle: RePEc:ehu:dfaeii:200205

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Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Keywords: expected returns; systematic liquidity risk; order flow; bid ask spread;

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  1. John Y. Campbell, 2000. "Asset Pricing at the Millennium," NBER Working Papers 7589, National Bureau of Economic Research, Inc.
  2. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  3. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2002. "Order imbalance, liquidity, and market returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(1), pages 111-130, July.
  4. Hanno Lustig & Yi-Li Chien, 2005. "The Market Price of Aggregate Risk and the Wealth Distribution," NBER Working Papers 11132, National Bureau of Economic Research, Inc.
  5. Olivier Renault & Jan Ericsson, 2000. "Liquidity and Credit Risk," FMG Discussion Papers, Financial Markets Group dp362, Financial Markets Group.
  6. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 56(1), pages 3-28, April.
  7. Wang, Jiang & Grossman, Sanford & Campbell, John, 1993. "Trading Volume and Serial Correlation in Stock Returns," Scholarly Articles 3128710, Harvard University Department of Economics.
  8. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  9. George M. Constantinides, 2002. "Rational Asset Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 57(4), pages 1567-1591, 08.
  10. Bengt Holmstrom & Jean Tirole, 1998. "LAPM: A Liquidity Based Asset Pricing Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 98-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(3), pages 441-464, July.
  12. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 59(3), pages 383-411, March.
  13. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(2), pages 223-249, December.
  14. Belén Nieto, 2002. "La valoración intertemporal de activos: un análisis empírico para el mercado español de valores," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 26(3), pages 497-524, September.
  15. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 2185-2221, October.
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Cited by:
  1. Wang, Jinan & Chen, Langnan, 2012. "Liquidity-adjusted conditional capital asset pricing model," Economic Modelling, Elsevier, Elsevier, vol. 29(2), pages 361-368.

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